Liberia is a typical example amongst the developing African countries making noticeable effort to expand their tax base to the size it should appropriately be, therefore collecting more taxes and adapt in the fast-changing local and global business environment. To that end, Transfer Pricing Regulation (TPR) was introduced by the Liberia Revenue Authority (LRA) with a sole intent: to ensure that a fair market price of service is paid and that fraud is avoided. Nonetheless, until recently, the notion of transfer pricing was totally out of grasp; not only to the taxpayers, but also to CEOs, CFOs, business owners and even lawyers, accountants and judges. Against this backdrop, it is totally normal that since the issuance of that regulation, the LRA has joined other tax administrators around the world, particularly in developed countries, trying to tackle transfer pricing practices that erode the tax base of developing economies such as Liberia. United Nations, OECD, ECOWAS (Economic Community of West African States) WATAF (West African Tax Administration Forum) have already stepped in and will continue to provide help and guidance.
All this boils down to the conclusion that the noose is tightening on transfer pricing schemes resulting in tax avoidance. This sudden need for transfer pricing compliance, combined with the increased interest of the LRA, renders the need for transfer pricing expertise of the utmost importance.
A brief approach to the latest developments
As implied above, the the official Gazette of the Government of Liberia of 11.11.2016 promulgated the Liberia Income Tax Transfer Pricing Regulations. To put it bluntly, it is Liberia’s tax law on transfer pricing practices. Hence, being essentially in effect from January 1st of the year after, it can be said that 2017 was the start of a new era for transfer pricing in Liberia.
More precisely, Section 211 of the Liberia Revenue Code (LRC) and the said Regulations generally apply to transactions between related persons (i.e. controlled transactions) including transactions between two related residents of Liberia (nonetheless the rules also apply to a transaction between two non-resident persons where the transaction involves a permanent establishment in Liberia of one of the non-residents). A person in this context may be an individual, a legal person or a partnership. Two persons are considered to be related where (a) One person directly or indirectly controls the other, or (b) the same person or persons directly or indirectly control both persons. A person controls another person where (1b) he owns directly or indirectly 50% or more of the share capital of the person or (2b) he has the practical ability to control the business decisions of the person. In this context, “directly or indirectly” means control through an intermediary or series of intermediaries. For example, if A owns 51% of the share capital of B and B owns 51% of the share capital f C, than A indirectly controls C.
As is the case globally, the Liberia Transfer Pricing rules apply the Arm’s Length Principle. In relation to a controlled transaction, this means that the results of a transaction are consistent with the results that would have been realized in a comparable transaction between unrelated persons dealing in comparable conditions. But which are the comparability factors?
i) Characteristics of the property or services
ii) Functions Undertaken
iii) The contractual terms of the Transaction
iv) General Economic Circumstances (such as business strategies)
Once the comparable transaction is found, the proper transfer price has to be found. To that end, the proper transfer pricing method has to be applied. Consistent with the OECD Guidelines, The Liberia Income Tax Transfer Pricing regulation (2016) recognizes the standard transfer pricing methods below:
i) The comparable uncontrolled price method
ii) The resale price method
iii) The cost plus method
iv) The transactional net margin method
v) The profit split method
What is of extra importance in the case of Liberia, is that neither the transfer pricing regulations nor any practice notes seek to impose an hierarchy for the transfer pricing methods. The Commissioner General acknowledges that the suitability of a method will depend on the facts and circumstances of each case.
The practical side of the issue
Taxpayers who are within the scope of the said rules are required to provide information about the transfer pricing in a transfer pricing return schedule document (Transfer Pricing Form), which must include information about the directors and shareholders, the current group structure and give details of any business restructuring has taken place within the last five years.
Moreover, the legal framework obliges the provision of financial information not only for the local enterprise but also for the consolidated group as a whole. Transactions with all the related parties (domestic and foreign ones as well) are also to be reported, no matter what their nature is (tangible or intangible assets, services etc). Special attention is drawn when it comes to related parties one of which is placed in low tax jurisdictions (i.e. with CIT – corporate income tax – below 20%), as it is likely that profit is shifted towards such jurisdictions, to the detriment of the country the wealth really originates from. According to the interpretation of the General Commissioner regarding Liberia’s legislation and regulations relating to transfer pricing ” […] the perception exists that transactions involving low tax jurisdiction are often motivated by tax rather than strictly commercial reasons”. Furthermore, when it comes to transactions with non monetary consideration between interrelated parties, the Liberian law obliges the provision of an equivalent market value.
The Transfer Pricing Form has to be submitted to the Liberia Revenue Authority with the annual income tax return which is due by the end of the third month after the end of each fiscal year. Consequently, since the first transfer pricing forms were filed on 31 March 2018 (for 2017 calendar year), the first transfer pricing audits are underway.
The purpose of the Transfer Pricing Form is – amongst others – to provide the tax administration with an overview of a taxpayer’s transactions with related parties. This information will be used to assess the risk of tax loss through transfer pricing on a national and sectoral level, and also the level of the individual taxpayer. The information will also be used in determining which taxpayers and issues are to be subject to audit.
In addition to the Transfer Pricing Form, Transfer Pricing Documentation should also be prepared in the same deadline to demonstrate that their measure of taxable income accords with the arm’s-length principle. This documentation must be in place when the income tax return is filed, yet it is only to be submitted to the Liberia revenue authority on request. Transfer Pricing Documentation renders the need for expertise in the realm even more intense.
What is more
Based on the overview of Jurisdictions Participating in the Convention on Mutual Administrative Assistance in Tax Matters as available on the website of the OECD, on June 11, 2018 Liberia signed the Amended Convention on Mutual Administrative Assistance in Tax Matters. The Convention on Mutual Administrative Assistance in Tax Matters provides a comprehensive multilateral framework for the exchange of information and assistance in tax collection. Its coverage includes administrative assistance between tax authorities for information exchange on request, automatic exchange of information, simultaneous tax examinations and assistance in the collection of tax debts.
Liberia has taken a huge step by introducing transfer pricing legislation. Since a lot of pressure is set upon this issue, people in charge of enterprises have to be extremely careful while dealing with subjects which may potentially have transfer pricing impact. Section 55 (e) of the Liberia Revenue Code imposes a penalty on any person who fails to maintain adequate records (Penalty for Incorrect Documentation Submission): “If a person fails to maintain books and records as described in subsections (a) and (b) then in addition to any applicable penalty under Section 51 and Section 52, there also shall be imposed as a penalty for inadequate recordkeeping the amount of 150 percent of any underpayment of tax that may have resulted from the lack of adequate recordkeeping. A person subject to the penalty for inadequate recordkeeping for three or more years within a five-year period or whose total understatement of tax for any year is an amount equal to more than 50 percent of the tax due shall on conviction be subject to a term of imprisonment of up to 4 years. This penal provision also applies to transfer pricing documentations. After all, as mentioned above, the first transfer pricing audits are already underway.
The fact that just recently Liberia signed the Amended Convention on Mutual Administrative Assistance in Tax Matters (including administrative assistance between tax authorities for information exchange on request, automatic exchange of information, simultaneous tax examinations and assistance in the collection of tax debts), shows that LRA is determined to give extra priority to transfer pricing issues which have been in fact unruled for ages but now there has been a paradigm swift. Cross examining will bring into light strategies that contravene to the said transfer pricing guidelines.